26 January 2006, 9.00am
OCR unchanged at 7.25 per cent
The Official Cash Rate (OCR) will remain unchanged at 7.25 per cent.
Reserve Bank Governor Alan Bollard said: "The economy has continued to slow in recent months, broadly in line with the
outlook contained in our December Monetary Policy Statement. GDP growth slowed in the third quarter of 2005, due to the
impact of the high exchange rate on the export and import-competing sectors, and a fall in construction.
Looking to 2006, while there are some early indications, we are yet to see hard evidence of a sustained slowdown in
domestic demand. To date, strong domestic demand has been fuelled by strong employment, wage growth, rising house
prices, and growth in Government spending. Overall, total spending continues to outstrip growth in production,
contributing to an unsustainably large current account deficit.
"Over recent years, considerable pressures have built up on resources, leading to the current high level of inflation.
While capacity and resource constraints appear now to be easing, inflation pressures remain of concern. Annual CPI
inflation stands at 3.2 per cent, and our forecasts point to inflation remaining toward the upper end of the target band
over the next couple of years.
Continuing increases in wages, energy prices and other business costs suggest that inflation pressures will not subside
quickly. Of particular concern, inflation expectations remain uncomfortably high.
"Given this situation, we do not expect to raise the OCR further in this cycle; however, this possibility cannot be
ruled out until we see clear evidence of a sustained weakening in domestic demand. Certainly we see no prospect of an
OCR easing, given the relatively high medium-term inflation outlook. An early decline in interest rates, as expected by
some in the financial markets, would risk reigniting spending and hence inflation pressures."
ENDS